The Monetary Policy Committee today agreed to leave the Official Cash Rate (OCR) at 5.50%.
The level of interest rates are constraining spending and inflation pressure as anticipated and required. The Committee agreed that the OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1 to 3% annual target range, while supporting maximum sustainable employment.
Global economic growth remains weak and inflation pressures are easing. This follows a period of significant monetary policy tightening by central banks internationally. Global inflation rates continue to decline, assisted by the normalisation of international supply chains, and the decline in shipping costs and energy prices. The weaker global growth has led to lower export prices for New Zealand’s goods.
In New Zealand, inflation is expected to continue to decline from its peak, and with it measures of inflation expectations. Core inflation is expected to decline as capacity constraints ease. While employment is above its maximum sustainable level, there are signs of labour market pressures dissipating and vacancies declining.
Consumer spending growth has eased and residential construction activity has declined, while house prices have returned to more sustainable levels. More generally, businesses are reporting slower demand for their goods and services, and weak investment intentions.
The return of net inward migration continues broadly as anticipated, and is assisting to ease labour shortages. The net impact of immigration on overall capacity pressures remains uncertain. The ongoing recovery in tourism spending is supporting demand.
The repair and rebuild underway in regions of the North Island due to severe weather events will support economic activity in the near term. Broader government spending is anticipated to decline in inflation-adjusted terms and in proportion to GDP.
The Committee is confident that with interest rates remaining at a restrictive level for some time, consumer price inflation will return to within its target range of 1 to 3% per annum, while supporting maximum sustainable employment.
Record of meeting July 2023
The Monetary Policy Committee discussed recent developments in the New Zealand economy. The Committee agreed that monetary conditions are restricting spending and reducing inflationary pressure as anticipated. However, inflation remains too high. Spending needs to remain subdued to better match the economy’s ability to supply goods and services, so that consumer price inflation returns to its target range of 1 to 3%. Supply capacity constraints in the economy continue to ease.
Global economic growth remains below trend for most of our trading partners, partly as a result of significant monetary policy tightening by central banks internationally. Global growth is expected to weaken further. Economic growth is moderating more rapidly in China, with recent data suggesting a slowing in economic momentum.
Headline inflation has continued to fall in most countries, assisted by lower energy prices and a normalisation of international supply chains and shipping costs. However globally, core inflation remains high. This has prompted some central banks to further increase interest rates recently. In discussing recent central bank policy moves, the Committee noted that monetary policy in New Zealand reached a more restrictive level earlier than in many other economies.
The Committee discussed domestic economic developments. Recent data suggest that tight monetary conditions are constraining domestic spending as expected. Residential building activity has started to ease and falling consent numbers suggest it will continue to slow. Economic activity contracted slightly in the March 2023 quarter. Recent indicators suggest that growth is likely to remain weak in the near term, despite some support from repair and rebuild work underway in regions of the North Island due to severe weather events. Broader government spending is anticipated to decline in inflation-adjusted terms and in proportion to GDP.
Labour shortages have started to ease, partly in response to the recent arrival of more migrants. Firms report that it is becoming easier to find labour and economy-wide vacancy rates have fallen.
The Committee judged that after recent falls, house prices are now around sustainable levels. House prices have stabilised in recent months and the Committee noted that the outlook for the housing market has become more balanced. Higher net migration is supporting demand for housing but higher interest rates continue to exert downward pressure on housing demand.
The Committee agreed that there is no trade-off between meeting the Committee’s inflation and employment objectives and maintaining the stability of the financial system. Debt levels are high in some parts of the economy, and pockets of stress are emerging. However, early indicators point to only a moderate increase in stressed lending over the coming months and non-performing loans remain at very low levels.
In discussing their Remit objectives, the Committee noted inflation is still expected to decline within the target band by the second half of 2024. The Committee discussed risks to the persistence of domestic inflation pressures and imported inflation and judged that the risks around the inflation projection were broadly balanced. Employment remains above its maximum sustainable level, however recent indicators suggest that labour market conditions are easing.
The Committee noted that monetary conditions have continued to tighten with mortgage rates increasing further in recent months in response to higher wholesale rates. The Committee noted that bank term deposit rates had increased recently, broadening the transmission of tighter monetary policy. The lagged effects of previous monetary tightening is still passing through to households as more households move off lower fixed rates. Average mortgage rates on outstanding loans have increased from about 3% in early 2022 to about 5% currently. Based on current commercial bank pricing, average mortgage rates are expected to reach around 6% in early 2024.
The Monetary Policy Committee discussed the appropriate stance of monetary policy. The Committee agreed that interest rates will need to remain at a restrictive level for the foreseeable future, to ensure consumer price inflation returns to the 1 to 3% target range while supporting maximum sustainable employment.
On Wednesday 12 July the Committee reached consensus to leave the Official Cash Rate unchanged at 5.5%.